Australian Markets Weekly: 6 June 2017

Underemployment dragging on wages growth.

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Overview:

  • In this week’s Weekly we look at wages growth in Australia, which has failed to lift despite traditional models of wages consistently forecasting a pick-up.
  • Recent IMF work (Mohammad 2017) has found that traditional models of wages growth have largely underestimated the degree of spare capacity in the labour market by solely focusing on the unemployment rate. However, when including measures of underemployment (those wanting to work more hours) the models show a closer fit to historical wages growth.
  • A decomposition of this analysis finds underemployment and lower inflation expectations can almost fully account for subdued nominal wages growth over the past few years. This has significant implications in interpreting the amount of spare capacity in the labour market and suggests we need to look at both unemployment and underemployment when assessing the outlook for wages growth. It also suggests we are unlikely to get much in the way of wage inflation unless serious inroads are made into underemployment.
  • There are however some reasons for optimism. Measures of underemployment have a close relationship with the difficulty firms report in finding suitable labour (such a relationship could be due to firms gradually using up existing labour capacity amongst employees). The Quarterly NAB Business Survey suggests firms are finding it a bit more difficult on average in finding suitable labour, but that at the moment it is only a minor difficulty.
  • This week, the main local focus will be on the RBA Meeting Tuesday and Wednesday’s Q1 GDP. Offshore, the focus will be on the Non-manufacturing ISM tonight, followed by the ECB meeting (Thursday), UK election (Thursday) and the appearance of former FBI Director Comey before the US Senate Intelligence Committee.

For further details, please see the attached document:

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